ACCA PM Syllabus C. Decision-making Techniques - Maximax, Maximin and Minimax Regret - Past Papers ^{4 / 6}

The following scenario relates to questions 16–20.

Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five floors of the building are occupied and there are in total 1,240 employees.

Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and Mylo has to decide how many meals to make each day. As the office block is located in the city centre, there are several other places situated around the building where staff can buy their lunch, so the level of demand for lunches in the cafeteria is uncertain.

Mylo has analysed daily sales over the previous six months and established four possible demand levels and their associated probabilities. He has produced the following payoff table to show the daily profits which could be earned from the lunch sales in the cafeteria:

16. If Mylo adopts a maximin approach to decision-making, which daily supply level will he choose?

A    450 lunches
B    620 lunches
C    775 lunches
D    960 lunches

The following scenario relates to questions 16–20.

Mylo runs a cafeteria situated on the ground floor of a large corporate office block. Each of the five floors of the building are occupied and there are in total 1,240 employees.

Mylo sells lunches and snacks in the cafeteria. The lunch menu is freshly prepared each morning and Mylo has to decide how many meals to make each day. As the office block is located in the city centre, there are several other places situated around the building where staff can buy their lunch, so the level of demand for lunches in the cafeteria is uncertain.

Mylo has analysed daily sales over the previous six months and established four possible demand levels and their associated probabilities. He has produced the following payoff table to show the daily profits which could be earned from the lunch sales in the cafeteria:

17. If Mylo adopts a minimax regret approach to decision-making, which daily supply level will he choose?

A    450 lunches
B    620 lunches
C    775 lunches
D    960 lunches

The Mobile Sandwich Co prepares sandwiches which it delivers and sells to employees at local businesses each day.

Demand varies between 325 and 400 sandwiches each day. As the day progresses, the price of the sandwiches is reduced and, at the end of the day, any sandwiches not sold are thrown away. The company has prepared a regret table to show the amount of profit which would be foregone each day at each supply level, given the varying daily levels of demand.

Regret table

Applying the decision criterion of minimax regret, how many sandwiches should the company decide to supply each day?

A. 325
B. 350
C. 375
D. 400

Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed of at a cost of $0·50 per bag. Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of cement production to select.

Required:
(a) Construct a pay-off table to show all the possible profit outcomes. (8 marks)

Each bag of cement sells for $9 and costs $4 to make. If cement is unsold at the end of the year, it has to be disposed of at a cost of $0·50 per bag. Cement Co has decided to produce at one of the three levels of production to match forecast demand. It now has to decide which level of cement production to select.

Required:
(b) Determine the level of cement production the company should choose, based on the decision rule of maximin. Show your calculations clearly and justify your decision. (2 marks)